Bankrupt lawyer precluded from applying to court for indemnity from professional liability insurer

When a Canadian defendant in a lawsuit is also going through bankruptcy proceedings, the right to ask a court for indemnity from a professional liability insurer is vested in the trustee in bankruptcy rather than the policyholder, the Court of Appeal for Ontario suggested in a recent ruling.

In a decision released Monday, the court overturned an earlier finding that lawyer Alvin Meisels, an “undischarged bankrupt,” has standing to apply, to the Ontario Superior Court of Justice, for a declaration that Lawyers’ Professional Indemnity Company (LawPRO) is required to indemnify him in connection with a class action lawsuit launched against Meisels in Colorado. Toronto-based LawPRO’s products include professional liability insurance for Ontario lawyers.

Last December, Madam Justice Andra Pollak of the Ontario Superior Court of Justice issued an order containing a declaration that Meisels “has status” to apply for a declaration that Lawpro must indemnify Meisels “for all sums that he may be liable to pay for any settlement or judgment in the Colorado class action … including reimbursement for the defence costs in relation thereto”.

That order has now been set aside on appeal.

The trustee in Meisels’ bankruptcy “is not defending the class action on his behalf” and did not oppose his application for the order, noted the provincial appeal court, which cited the federal Bankruptcy and Insolvency Act.

Section 71 of BIA states:

“On a bankruptcy order being made or an assignment being filed with an official receiver, a bankrupt ceases to have any capacity to dispose of or otherwise deal with their property, which shall, subject to this Act and to the rights of secured creditors, immediately pass to and vest in the trustee named in the bankruptcy order or assignment, and in any case of change of trustee the property shall pass from trustee to trustee without any assignment or transfer.”

In 2014, the Superior Court of Justice agreed with Meisels that his claim “should be characterized as ‘personal in nature’ as it relates to his own alleged negligence,” Justice Pollak wrote at the time. She found that “the ‘thing in action’ [the right to bring the application] is not property that is vested with the trustee in bankruptcy.”

The Court of Appeal noted that in previous decisions, courts have ruled there is an exception, under BIA, for personal losses – such as pain and suffering, mental distress or reputational damage.

One case cited was a decision from the Supreme Court of Canada, released in October, 1997, in the case of Jack Wallace vs United Grain Growers Ltd. Wallace filed a wrongful dismissal lawsuit in 1986 against United Grain Growers. Wallace was an undischarged bankrupt at that time.

The Manitoba Court of Queen’s Bench struck out Wallace’s claim for breach of contract but that decision was reversed by Manitoba’s appeal court. Canada’s highest court agreed that Wallace was not precluded, by his bankruptcy, from suing for wrongful dismissal.

“The parties agreed that the claim for mental distress and loss of reputation, viewed in tort, would be personal in nature and thus would not form part of the bankrupt’s property divisible among creditors,” wrote Madam Justice Beverley McLachlin, Chief Justice of the Supreme Court of Canada, in 1997 in Wallace vs United Grain Growers. “The question arises whether an action for mental distress and loss of reputation founded on breach of an implied term of good faith in a contract is similarly personal in nature. In my view it is. The issue is not whether the action sounds in contract or tort, but whether the damages claimed are for personal loss as distinguished from proprietary loss.”

Justice McLachlin’s comments were made in a dissenting opinion (the majority opinion was written by Mr. Justice Frank Iacobucci) but the dissenting judges agreed with the majority that Wallace was not precluded by his bankruptcy from suing for wrongful dismissal.

In Weisels vs Lawpro, the Court of Appeal for Ontario ruled June 8, 2015 that Meisels’ application “is a claim in breach of contract that is solely about money” and is not a personal claim.

“The right to claim an indemnity and to enforce this claim by bringing an action is the right of the trustee in bankruptcy, and this right belongs to the trustee whether the indemnity is payable directly to the insured bankrupt or to a third party,” wrote Madam Justice Karen Weiler, Madam Justice Eleanore Cronk and Madam Justice Sarah Pepall in their decision. “This is so because, even though the proceeds do not form part of the bankrupt’s estate, if the claim is successful, all the creditors of the bankrupt may benefit from the reduction of another creditor’s claim.”